TRADE
POLICY REVIEWS: FIRST PRESS RELEASE, SECRETARIAT AND GOVERNMENT SUMMARIESCzech Republic: March
1996

The establishment of a liberal
and transparent international trade regime has been a key ingredient in the Czech
Republic's transformation to a market economy. This transformation, which has also
included such market-oriented reforms as price liberalization and the privatization of
state enterprises, has been facilitated by prudent macroeconomic management.

Liberal
trade policies fundamental to the Czech economic transformation Back
to top

The establishment of a liberal and transparent
international trade regime has been a key ingredient in the Czech Republic's
transformation to a market economy. This transformation, which has also included such
market-oriented reforms as price liberalization and the privatization of state
enterprises, has been facilitated by prudent macroeconomic management. After a severe
economic downturn during which GDP declined by some 21 per cent between 1990 and 1993, the
Czech Republic has managed to stabilize its economy, reduce inflation to 9 per cent and
maintain low unemployment. Real GDP growth in 1995, due mainly to increased private
consumption and investment, accelerated to an estimated five per cent from 2.6 per cent in
1994.

Czech trade policies will be discussed at a meeting
of the WTO's Trade Policy Review Body on 6-7 March. According to the WTO Secretariat
report which will serve as the focus of the discussion, the Czech trade regime is a
transparent one. Import policies are characterized by most-favoured-nation (m.f.n.)
tariffs applied at moderate rates on an ad valorem basis. There are no specific, composite
or other non-ad valorem tariffs, and non-tariff measures are used infrequently. However,
even though the 1995 simple average m.f.n. tariff of 8 per cent is moderate, average
tariffs rise from four per cent for primary products to six per cent for semi-processed
goods and to 10 per cent for fully processed goods. Agricultural products have
particularly high tariffs on a few items while food products and beverages have tariffs
averaging 19 per cent. The report states that countries with which the Czech Republic has
regional trade agreements account for 80 per cent of total merchandise trade. Such
agreements encompass all major trading partners except Russia,(1) and agreements with
other countries are being considered. The countries with which the Czech Republic has
preferential agreements would also likely be its major trading partners even in the
absence of such agreements. However, in combination with generally low m.f.n. tariffs this
suggests, according to the report, that the Czech Republic's network of trade agreements
is, on balance, net trade-creating. Simple average tariffs applied to imports from
preferential trading partners in 1995 ranged from an average of 3.3 per cent for Slovenia
to 6 per cent for Poland. Tariffs on imports from the European Union, to which the Czech
Republic recently applied for membership, averaged 5.5 per cent. The Czech Republic counts
imports made at preferential tariff rates against the m.f.n tariff quota levels
established under the minimum market access provisions of the Uruguay Round Agreement on
Agriculture, a practice that the report notes reduces market access for non-preferential
suppliers.

An original member of both GATT and the WTO, the
Czech Republic has been successful in attracting foreign investment, receiving one fourth
of the total foreign direct investment made to date in central and eastern Europe. Foreign
investors may transfer their share of after-tax profits to their country of origin and
foreign-owned capital may be fully repatriated. Privatization has proceeded rapidly.
Before starting with economic reforms, four per cent of GDP was privately owned. By 1995,
some 80 per cent of the economy's assets were privately owned and well over 60 per cent of
GDP was accounted for by the private sector.

The Czech Republic has no anti-dumping,
countervailing duty or safeguards legislation in force and has never applied such
measures; legislation is being prepared in these areas and is expected to be implemented
later this year. The report states that the Czech Republic has resorted to monitoring the
exports of some products partly to avoid the imposition of anti-dumping measures by
importing countries. It notes that certain provisions could be included in the legislation
to reduce the risk of established domestic firms abusing anti-dumping law to stifle import
competition. For example, the new legislation could include a public interest clause
requiring that the potentially harmful effects of anti-dumping measures on consumers and
downstream industries be considered in the decision process.

Under the General Agreement on Trade in Services
(GATS) the Czech Republic has made commitments to allow foreign firms to establish a
commercial presence in the country in order to provide a variety of services. The Czech
Republic has taken m.f.n exemptions in four service sectors: audio-visual services and
passenger and freight transport services on internal waterways, rail traffic, and road
transport. External services receipts range between 13 and 15 per cent of GDP. Recently,
the Czech Republic has had external services trade surpluses equivalent to two to six per
cent of GDP.

The Czech Republic is party to all major
multilateral agreements in the field of intellectual property rights. Foreign
right-holders receive the same treatment as Czech legal or natural persons. In the area of
industrial designs and patents the Czech Republic grants national treatment only on a
reciprocal basis; however, acceptance by other governments of the WTO TRIPS (intellectual
property) Agreement is considered to satisfy requirements of reciprocity.

The importance of foreign trade to the Czech economy
is indicated by the fact that the value of goods and services trade exceeded GDP in 1994.
The significance of trade is one reason why the Czech Republic takes great interest in the
trade policies of its partner countries and has been active in GATT and WTO efforts to
strengthen multilateral trade rules. At home, the Czech Republic has fully recognized the
importance of trade in promoting effective economic competition, which lies at the heart
of the transition to a market economy. The country's liberal trade regime, according to
the report, has a positive and important role in this transition.

Notes to Editors:

The WTO Secretariat's report, together with a report
prepared by the Czech Republic will be discussed by the WTO Trade Policy Review Body
(TPRB) on 6 and 7 March 1996. The WTO's TPRB conducts a collective evaluation of the full
range of trade policies and practices of each WTO member at regular periodic intervals and
monitors significant trends and developments which may have an impact on the global
trading system.

Two reports, together with a report of the TPRB's
discussion and of the Chairman's summing up, will be published in due course as the
complete Trade Policy Review of the Czech Republic and will be available from the WTO
Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

The reports cover development of all aspects of the
Czech Republic's trade policies, including domestic laws and regulations, the
institutional framework, trade policies by measure and by sector. Since the WTO came into
force, the "new areas" of services trade and trade-related aspects of
intellectual property rights are also covered. Attached are the summary observations from
the Secretariat and government reports. Full reports will be available for journalists
from the WTO Secretariat on request.

The Czech Republic became a sovereign State on 1
January 1993 following the dissolution of the Czech and Slovak Federal Republic (CSFR).
The dismantling of the former central planning régime and movement toward a market
economy were begun under the CSFR in 1990 and have been continued by the Czech Republic.
Market-oriented reforms have encompassed the decontrol of prices, the privatization of
State enterprises, the opening of the economy to foreign investment, the liberalization of
the foreign exchange régime, and the relaxation or elimination of foreign trade
restrictions. Prudent macroeconomic management during the reform period has facilitated
the implementation of reforms. Nevertheless, led by the collapse of export demand from
former key trading partners, and with a decline in domestic demand, the economy underwent
a severe economic contraction during the early 1990s.

The Czech Republic has liberal and transparent
international trade policies. Its trade régime is characterized by m.f.n. tariffs applied
at moderate rates on an ad valorem basis and by the infrequent use of non-tariff barriers.
The resulting openness has contributed to the economic growth and stability that have been
experienced to this point in the economic transformation. The multilateral obligations
that the Czech Republic has accepted in many areas, such as its comprehensive tariff
bindings, help to ensure the continuation of this openness.

The Czech Republic in World Trade

Led by a 17 per cent increase in fixed capital
formation and a 5 per cent increase in private consumption, Czech real GDP grew by 2.6 per
cent in 1994; inflation was in the order of 10 per cent and unemployment, at 3 per cent,
remained low. Per capita income increased to the equivalent of US$3,490. Growth
accelerated in 1995 to an estimated 5 per cent, largely consequent upon further increases
in private consumption and investment, including stock building. Inflation moderated to
around 9 per cent and unemployment remained at about 3 per cent.

Growth in investment exceeded that of savings by the
equivalent of 2.2 per cent of GDP in 1994; this was reflected in a shift of the current
account from a surplus of 2.2 per cent of GDP in 1993 to approximate balance in 1994. The
merchandise trade deficit widened from 1 per cent in 1993 to 2.4 per cent of GDP in 1994
while the services trade surplus declined from 3.2 per cent to 2.1 per cent of GDP.
Substantial capital inflows nevertheless led to a balance-of-payments surplus of nearly 10
per cent of GDP; as a result there was an increase in official reserves to the equivalent
of four months of goods and services imports.

Continued substantial inflows of foreign capital
during 1995 led to a further sharp increase in foreign exchange reserves, complicating
monetary management. Concurrently, the current account deficit widened to about 4 per cent
of GDP, led by a sharp deterioration of the trade account, which recorded a deficit of
some 8 per cent of GDP. Strong domestic demand, especially for investment goods, and an
appreciation of the real (inflation adjusted) effective exchange rate of the koruna
contributed to this opening of the trade deficit. These factors may indicate the need for
a tightening of financial policies to reduce inflationary pressures and forestall losses
in competitiveness. Such policies would help safeguard the transition process and act
against any possible build up of demands for protection.

Services accounted for almost 53 per cent of GDP in
1994, with industry, including construction, responsible for 41 per cent, and agriculture
and forestry for somewhat under 6 per cent. The Czech Republic is a net importer of fuels
and related products, chemicals, and machinery and transport equipment. It is a net
exporter of other manufactured products.

The Czech Republic's geographic pattern of trade has
changed fundamentally since 1989, when most trade was with the Soviet Union and other
central and eastern European countries. Excluding trade with Slovakia, the share of Czech
merchandise exports to (western) industrial countries increased from 37 per cent in 1989
to 71 per cent in 1994. Czech trade is concentrated in Europe, with some 88 per cent of
both merchandise imports and exports exchanged with European countries, including Russia.
Some 56 per cent of imports are from the European Union (particularly Germany and
Austria), with other large import sources being Slovakia and Russia. The largest share of
exports, 54 per cent, go to the European Union (again, particularly Germany and Austria),
followed by Slovakia, Russia and Poland.

Trade Policy Framework

Czechoslovakia was an original member of the GATT,
and the Czech Republic acceded to the GATT in 1993 with no lapse in its application of the
General Agreement. The Czech Republic ratified the Uruguay Round Agreements in December
1994 and is an original member of the WTO. All WTO members and GATT contracting parties
receive at least m.f.n. treatment, as do several other countries with which bilateral
agreements containing m.f.n. treatment have been completed and others to which such m.f.n.
treatment has been granted autonomously.

Regional trade agreements account for 80 per cent of
the Czech Republic's total merchandise trade and encompass all major trading partners
except Russia. The six agreements are the Czech-Slovak Customs Union, the EU Association
Agreement, the Central European Free Trade Agreement (CEFTA, which includes the Czech
Republic, Hungary and Poland), and free-trade agreements with Romania, Slovenia, and the
countries of the European Free Trade Area (EFTA). Agreements with other countries are
being considered or are under negotiation.

The Czech-Slovak Customs Union took effect on 1
January 1993, upon the dissolution of the CSFR. The countries share a common external
tariff, though goods from third countries do not circulate freely between them. Most other
trade-related policies, such as import licensing and preferences under the Generalized
System of Preferences (GSP), are harmonized. Upon the termination of monetary union
between the Czech and Slovak Republics in February 1993, a bilateral clearance arrangement
went into effect for most commercial transactions between the countries. This arrangement
was eliminated at end-September 1995, with the Czech koruna fully convertible for current
account transactions as of 1 October 1995.

The Czech Republic is expected to apply for
membership in the EU in early 1996. Much of its trade-related legislation has already been
harmonized to that of the EU, and this process of harmonization continues. The
Czech-Slovak common external tariff, with a simple average of 8 per cent, averages some 2
percentage points less than the EU tariff.

The countries with which the Czech Republic has
preferential agreements would likely be its major trading partners even in the absence of
such agreements. Together with relatively low m.f.n. tariffs, this limits trade diversion
and suggests that the Czech Republic's network of trade agreements is, on balance, net
trade-creating. So long as tariffs on imports from third countries are not raised, these
features increase the likelihood that the Czech Republic's network of trade agreements is
economically beneficial from a global perspective.

The Czech Republic's liberal trade rules are
complemented by its generally open direct investment régime. Foreign direct investment is
encouraged and the Czech Republic has been successful in attracting investment, receiving
one fourth of the foreign direct investment in the central and eastern European region.
Under most circumstances investments are not subject to approval. Following registration,
foreign firms and individuals may conduct business under the same conditions and to the
same extent as domestic firms, with few exceptions. Foreign investors may transfer their
share of after-tax profits to their country of origin, and foreign-owned capital may be
fully repatriated in the event of the dissolution of an enterprise. Under the General
Agreement on Trade in Services (GATS), the Czech Republic has undertaken horizontal and
specific commitments that help to ensure that foreign firms are able to establish a
commercial presence in order to provide many types of services.

Privatization of former State enterprises has
proceeded rapidly. Before the start of the economic transformation, 4 per cent of GDP was
privately produced; by 1995 some 80 per cent of the economy's assets were privately owned
and well over 60 per cent of GDP was accounted for by the private sector. The
privatization of small enterprises from 1990 to 1992 resulted in more than 20,000
enterprises being sold at public auction. Large enterprises were privatized in two waves
beginning in 1991 and 1993 using a mixture of standard methods, such as direct sales, and
voucher privatization. Some industrial and public utility enterprises had not yet been
privatized as of October 1995. Privatization is expected to be completed with the future
sale of these enterprises. Voucher privatization, under which Czech citizens could
purchase vouchers at low prices and use them to bid on shares in enterprises undergoing
privatization, was successful because of its rapid pace and the public support it helped
to develop for the privatization process. However, voucher privatization was implemented
without the prior restructuring of State-owned enterprises, perhaps delaying the process
of industrial restructuring.

Trade policy features and trends

Type and incidence of policy instruments

Overall, the Czech import régime has relatively few
non-tariff import barriers or export measures. Non-automatic import licensing requirements
are used occasionally, sometimes for environmental reasons. Automatic licensing
requirements, apparently motivated by health and safety considerations, exist for the
exporting or importing of many products. In some cases, such as for textiles and clothing,
exports are restricted or monitored in accordance with bilateral trade agreements. Export
subsidies are limited to the agricultural sector.

The Czech Republic applies the EU's Combined
Nomenclature (CN) tariff classification, of 10,446 eight-digit tariff lines. At the end of
1994, only 3 per cent of tariff lines in the Czech-Slovak common external tariff remained
unbound; all remaining unbound tariffs were bound upon the beginning of the implementation
of the Uruguay Round, on 1 January 1995.

All tariffs are currently applied at their bound
rates and no specific, composite or other non-ad valorem tariffs are used, making the
external tariff very transparent. While the simple average m.f.n. tariff rate is
relatively moderate, Czech m.f.n. tariffs are escalatory: average tariffs rise from 4 per
cent on primary products to 6 per cent on semi-processed products and 10 per cent on fully
processed products. The simple average tariff applied on imports from preferential trading
partners ranges from 3.3 per cent for Slovenia to 6.0 per cent for Poland, and equals 5.5
per cent for the EU.

The Czech Republic is a party to all major
multilateral agreements in the field of intellectual property. Foreign right-holders
receive the same treatment as Czech legal or natural persons, except that in the areas of
industrial designs and patents the Czech Republic grants national treatment only on a
reciprocal basis. The authorities state that acceptance by other parties of the TRIPS
Agreement, a requirement of WTO membership, will be considered to satisfy the reciprocity
requirement.

Temporary measures

The Czech Republic has no anti-dumping (AD),
countervailing duty (CVD) or safeguards legislation in force and has never applied such
measures. Legislation is being prepared in these areas and is expected to be implemented
in 1996. Like other WTO members that choose to include such provisions in domestic law,
the Czech Republic faces the problem of designing rules in such a way as to minimize the
possibility that established domestic firms can abuse them to stifle economic competition.
It has sometimes found itself on the other end of such practice and has adopted export
monitoring (export licence requirements) partly to avoid AD or CVD actions being taken
against Czech exporters. To help protect effective economic competition, the Czech
Republic could consider including two provisions in its legislation. First, the use of
anti-dumping measures could be restricted to those occasions when foreign firms can be
shown to engage in predatory pricing with the intent of establishing a monopoly position
in the Czech market. Similar standards are sometimes used in domestic competition law.
Second, the legislation could include a public interest clause requiring the economic
effects of potential AD and CVD measures on consumers and downstream industries to be
considered in the decision process.

Sectoral policy patterns

The Czech Republic's m.f.n. tariffs are fairly
uniform across economic sectors. Exceptions are agriculture, which, following Uruguay
Round tariffication, has particularly high tariffs on a few items, and food products and
beverages, which have tariffs averaging 19 per cent, nearly triple the level elsewhere in
the economy. Tariff escalation with the level of processing is most noticeable in sectors
such as food processing, textiles and clothing. The tariff structure provides import
protection to higher-level processing activities in manufacturing sectors.

Active industrial policy is limited to the
agriculture sector. The State is involved through setting intervention prices and granting
export subsidies for some commodities and by providing concessionary loans and credit
guarantees. Many measures, such as tariff quotas and seasonal tariffs, are applied to
agricultural imports, as in many other countries; some of these replaced variable import
levies as a result of the Uruguay Round. Notably, the Czech Republic counts imports made
at preferential tariff rates against the m.f.n. tariff quota levels established as a
result of the Uruguay Round minimum market access provisions; this reduces the market
access for non-preferential suppliers.

The Czech Republic generates external services
receipts equivalent to some 13 to 15 per cent of GDP, and in recent years has had services
trade surpluses of 2 to 6 per cent of GDP. A strong advocate for the introduction of
multilateral rules for services trade in the Uruguay Round, the Czech Republic made a
comparatively large number of commitments under the General Agreement on Trade in Services
(GATS). These include a horizontal commitment (with some sectors excepted) not to limit
the ability of foreign firms to establish a commercial presence, thus providing a more
secure environment for the establishment of foreign-owned service providers. The Czech
Republic has listed five measures inconsistent with m.f.n. treatment. These measures
affect four different services sectors and, under the GATS, should not be applied for more
than ten years. They are subject to future negotiations.

Trade policies and trading partners

International trade is extremely important to the
Czech Republic, with the ratio of merchandise and services trade to GDP equal to some 105
per cent in 1994. Recognizing this importance, the Czech Republic has constructed a
relatively open trading régime that underpins its transition to a full market economy.
Trade promotes effective economic competition, which lies at the heart of the economic
transition. Able to purchase inputs from abroad without, in most cases, substantial taxes
or restrictions being imposed, Czech firms have so far proven able to maintain export
volumes despite the increasing real value of the Czech koruna.

The Czech Republic's moderate size and high
propensity to trade suggest its keen interest in the trade policies of partner countries.
During the Uruguay Round, the Czech Republic sought more transparent conditions for the
application of non-tariff measures in order to prevent protectionist abuses of such
measures. It was hoped, for example, that rules could be developed that would lead to a
substantial reduction in the number of anti-dumping actions. The Czech Republic supported
reductions in production and export subsidies for agricultural products, the development
of multilateral rules for services through the GATS, and the safeguarding of intellectual
property rights under the TRIPS Agreement, while strongly opposing the linking of labour
standards to trade policy.

Since the political changes in former
Czechoslovakia in November 1989, the Czech Republic has undergone rapid and deep
transformation and democratization resulting in a new social and economic orientation of
the country. Over the past five years, decisive reform steps have focused on
liberalization of foreign trade and prices, radical privatization, demonopolization,
internal convertibility of the national currency and rapid development of the institutions
necessary to ensure an efficient fully-fledged market economy.

Significant changes in the Czech economy resulted in
the political and economic stability. Sound and consistent macroeconomic policies have
been implemented, microeconomic transformation has progressed and the social consensus on
economic policy has not been endangered by excessive hardships or uneven distribution of
burdens. An open and liberal trade policy based on internationally agreed rules and
principles has been pursued. Political and economic changes in 1989 and subsequent
liberalization of foreign trade enabled the Czech Republic to engage a meaningful role as
a credible GATT contracting party.

Experience of the past five years indicates that the
Czech economy overcame the unfavourable economic consequences of the transformation and
that the elimination of the remaining negative factors, including the necessary adjustment
of production base and certain systemic measures, is and will be outweighed by current
positive developments. Recent results prove that the Czech Republic has already entered
into the post-transformation stage since the basic reform objectives have already been
accomplished and the rapid GDP growth guaranteed. As a result of these developments, the
Czech Republic became an OECD member in December 1995.

Trade policy

After the changes in 1989, a fundamental shift in
the evaluation of former political and trade priorities, and in the overall orientation of
the Czech Republic took place. The current trade policy is based on the principles of
market economy, free competition and respect for international rules and principles as
embodied in the WTO Agreement and arrangements annexed thereto. The Czech Republic is a
strong supporter of the open and liberal multilateral trading system.

The prime objectives of the Czech trade policy may
be summarized, as follows:

A Pursuance of liberal and open trade policy,
aimed at increasing security and predictability of market access, enhancing economic
competition, implementing binding international trade agreements and completing the
framework for domestic trade policy mechanism;

B Active participation in the multilateral
trading system based on agreed rules and principles and on implementation of all
agreements concluded during the Uruguay Round;

C Mutual reinforcement of multilateral,
plurilateral and bilateral trade relations; gradual integration into the European Union
leading to full membership.

The trade policy system inherited from former
Czechoslovakia in 1992 has been further developed and liberalized by the Czech Republic. A
key role is played by tariffs. A substantial reduction of the previously excessive number
of quantitative restrictions and other barriers to trade has been realized. The list of
products subject to import or export licensing procedures has decreased significantly and
is limited to some specific categories of goods. The Czech Republic has not resorted to
safeguard, anti-dumping or countervailing actions.

The average customs incidence of the Czech tariffs
is low and it does not exceed the level of 5.9 per cent; on industrial products (Chapters
25-97) 5.2 per cent and on agricultural products (Chapters 1-24) 13 per cent.

As a result of tariff reduction commitments of the
Uruguay Round, the new weighted tariff average will be 4.5 per cent. The weighted average
tariff on industrial products and agricultural products will decline to 4.1 per cent and
9.3 per cent, respectively.

Most rates of customs duties range from 0 to 5 per
cent and from 5 to 10 per cent (in total 70 per cent of all CN Codes). Fourteen per cent
of all CN Codes are duty free. The rest of duties, particularly on agricultural products,
is above 10 per cent. The Czech Republic applies ad valorem customs duties only.

The share of GATT-bound MFN duty rates has increased
from 97 to 100 per cent as a result of the 1994 Uruguay Round commitments.

The Czech Republic provides GSP treatment to
developing countries, the main purpose of which is to serve as an instrument for
development of trade relations with those countries and to provide further improved market
opportunities for a large number of products.

The new GSP scheme has secured continued application
of duty-free treatment for all goods originating in the least-developed countries. For
other beneficiary countries, duty reductions are modulated and are dependent upon the
sensitivity of individual products.

The main purpose of the licensing system of the
Czech Republic is to monitor imports and exports of certain products, to protect public
health, safety and security and to administer measures such as those adopted pursuant to
the relevant provisions of the GATT 1994.

In general, no quantitative limitations are applied
to the importation of goods. The only exceptions relate to restrictions on imports of
uranium or thorium ores, natural or enriched uranium and coal. Restrictions on these
products are maintained for security and environmental reasons.

Most consumer subsidies, as well as subsidies
allocated to industry and agriculture were removed or restructured. Subsidies were scaled
down from 16 per cent of GDP in 1989 to 3 per cent in 1994. The total value of subsidies
in 1994 amounted to Kc 31.211 million of which Kc 8.273 million were directed to
agriculture. The agriculture programmes targeted at the restructuring of agriculture
production, support of private farming, environment, other non-production functions of
agriculture and at the market regulation of selected agricultural commodities.

State support was granted also to energy saving
measures, research and development, restructuring of mining industry and to transport.
Export promotion through insurance of export credits against commercial and political
risks and compensation for differences between domestic and international interest rates
were provided strictly in compliance with the international standards (OECD Consensus).

The Public Procurement Act entered into force on 1
January 1995. Procedures under the Act are based on the WTO Agreement on Government
Procurement and are very similar to them. The Act provides for mandatory procedures to be
followed in procurement by public contracting authorities, open competition of tenders in
connection with public contracts and for its supervision. The Czech Republic is exploring
the possibility of acceding to the WTO Agreement on Government Procurement.

The Czech Republic is a founding Member of the WTO
as it has met all requirements of the WTO Agreement in time to be eligible to become an
original Member. The Czech Republic ratified the Final Act on 15 December 1994 and
deposited its instrument of ratification on 23 December 1994.

The Czech Republic acceded to the General Agreement
on Tariffs and Trade, pursuant to Article XXXIII, on 15 April 1993, following the split-up
of the former Czech and Slovak Federal Republic (CSFR) on 1 January 1993.

Accession procedures reflected the exceptional
circumstances stemming from the dissolution of the State and determination of both
successor States - the Czech Republic and the Slovak Republic - to fulfil the high level
of commitments incumbent upon the CSFR and to accede to the GATT under the same terms as
those applied by the CSFR. Transitional arrangements providing for the interim period
until the necessary procedures had been fulfilled and the entry into force of the rights
and obligations of the Czech Republic as from 1 January 1993 enabled the Czech Republic to
maintain its GATT relations without any interruption.

Czechoslovakia was one of the 23 founding
contracting parties to the GATT 1947. The Czech Republic participated actively in the
Uruguay Round of multilateral trade negotiations and presented comprehensive and valuable
offers both on goods and services. The offers consolidated the previous autonomous
liberalization initiatives which were further improved to comply with the agreed
parameters for trade liberalization under the Uruguay Round. These offers were made
regardless of the difficulties caused by the split-up of Czechoslovakia.

As of 1 January 1995, the Czech Republic started to
implement the Uruguay Round results. The most immediate phase was the implementation of
market access commitments, including wide-range tariff reductions of MFN tariffs.

On 1 January 1995, the Czech Republic effected - in
accordance with the terms of its Uruguay Round Schedule - the first part of the total
reduction of tariffs on industrial products. Tariff cuts covered also pharmaceutical and
chemical goods which had been committed under respective sectoral initiatives.

As a result of tariff commitments in industrial
products, the Czech Republic's MFN tariffs products are fully bound. An average customs
incidence is very low at the level of 5.2 per cent which will further decline to 4.1 per
cent in 2000.

Under the Agreement on Agriculture, the Czech
Republic has committed to tariff cuts of nearly 40 per cent on simple average (weighted
average from 13 per cent to 9.3 per cent) and to maintenance or increase of current market
access opportunities during the implementation period 1995-2000.

The Czech Republic abolished all variable levies
applied on a number of products and converted them into ordinary customs duties which
remain the only border measure protecting domestic producers. Since 1 January 1995, the
first instalment amounting to one sixth of the total reduction in all agricultural tariffs
was implemented. Market access opportunities have been expanded in equal proportion and
tariff quotas opened, allowing imports under improved tariff conditions.

In textiles and clothing, the Czech Republic has
started integrating into GATT 1994 the first part of products accounting for not less than
16 per cent of the total volume of the Czech Republic's imports in 1993.

Services obligations have been applied fully in
accordance with agreed terms. The Czech Republic has played an active role in negotiation
on financial services and joined an interim agreement in this area, thus contributing to
reach a critical mass of participating countries. In the context of these negotiations,
the Czech Republic has decided to improve substantially its schedule in financial services
and to withdraw relevant MFN exemptions. The Czech Republic has participated in
negotiations on movement of natural persons, basic telecommunications, maritime transport
and on GATS rules.

The Czech Republic has undertaken a substantial
review of the national legislation to ensure its conformity with obligations resulting
from the Agreements annexed to the WTO Agreement. A number of regulations and
administrative procedures was modified, in particular in the areas of market access and
subsidies. A decision to promulgate a new legislation on anti-dumping, countervailing and
safeguards was taken and respective legislative process has been started. It is expected
to be completed in 1996.

Regional agreements

The Europe Agreement on Association between the
European Communities and their member States and the Czech Republic was signed on 4
October 1993 and entered into force on 1 February 1995.

The objective of the Europe Agreement is to provide
appropriate framework for the political dialogue and the Czech Republics gradual
integration into the Communities and to provide basis for the Communities' financial and
technical assistance to the Czech Republic. The Agreement recognizes that the association
will assist to the Czech Republic's ultimate objective which is the accession to the
Communities.

The most immediate objective of the Europe Agreement
after its entry into force was to establish a free trade area within a transitional period
of ten years through a gradual elimination of duties and other barriers in mutual trade
based on multilaterally agreed rules and principles.

The Agreement establishing the Customs Union between
the Czech Republic and the Slovak Republic was signed on 29 October 1992 as an important
complementary part of a political decision to dissolve the former CSFR and with the aim to
preserve, to the extent possible, the continuity of a broad range of past links from the
single economic space. Conclusion of the Agreement which entered into force on 1 January
1993 was also motivated by the necessity to secure the continued implementation of
international obligations of the former CSFR under other international agreements,
especially the GATT, and of commitments in regard to third countries.

The main objective of the Agreement is to ensure the
free movement of goods (Chapters 1-97) and services, the pursuance of conforming
commercial and customs policies and the provision of favourable conditions for development
of trade with third countries.

The Free Trade Agreement between the EFTA States and
the former CSFR was signed in 1992. Following the split of the CSFR on 1 January 1993, the
Agreement was applied on an interim basis.

The continued application of the Agreement was
definitively settled on 19 April 1993 when the Czech Republic and the EFTA States signed
the Protocol on the succession by the Czech Republic to the Agreement between the EFTA
States and the CSFR. The separate, but identical, Protocol was signed between the Slovak
Republic and the EFTA States.

The objective of the Agreement is to establish
gradually a free trade area during a transitional period ending by 30 June 2002. The
Agreement covers trade in industrial products, including fish and other marine products,
and processed agricultural products.

With the aim to recover mutual trade and to further
explore the potential of closer regional co-operation, the Czech Republic has concluded
plurilateral free trade agreement with Hungary and Poland and bilateral free trade
agreements with Slovenia and Romania.

Central European Free Trade Agreement (CEFTA)
concluded by the Czech Republic, Hungary, Poland and Slovakia entered into force in March
1993. Agreements with Slovenia and Romania entered into force in January 1994 and in
January 1995, respectively.

These agreements provide for establishment of free
trade areas during different transitional periods ending not later than on January 2001
for the CEFTA Agreement, January 1996 and January 1998 for Slovenia and Romania,
respectively.

The Czech Republic has concluded bilateral
agreements with a large number of countries, both developed and developing and the CIS
member States.

Fiscal and monetary policy

The basic objective of the macroeconomic policy of
the Czech Republic has been to attain and strengthen macroeconomic stability through a
tight fiscal and monetary policy.

Fiscal policy has been pursued in order to reach and
maintain a balanced budget. A stringent budgetary policy was introduced, supplemented by
substantial reform of public finance, both on the revenue and expenditures sides, and by a
complete change of tax structures.

Since 1 January 1993, a new taxation system, based
on value-added tax (VAT), consumer tax, income taxes and taxes on property, has been
implemented with the purpose of creating a framework conforming with market economy
conditions.

The monetary policy has been concentrating on
reducing inflation since the initial complex liberalization of prices and considerable
devaluation of the national currency brought about an important surge in prices. The
currency exchange rate has been fixed for a long time at the same level in respect of free
convertible currencies.

The ultimate goal of a fully convertible Czech crown
has been reached in October 1995. Since 1991, the nominal exchange rate of the Czech crown
fixed against a basket of five currencies and later on against two (USD and DEM) has
remained stable and has been considered as a nominal anchor of the reform process.

Privatization

The privatization scheme followed three important
goals, namely speed, equity/fairness, and the enforcement of owners control over firms. To
allow the private sector to develop rapidly, small-scale and large-scale privatisation
schemes were adopted. They were further complemented by a restitution programme.

Under the small-scale privatization scheme, launched
in January 1991, small businesses such as retail stores, restaurants and service
facilities were sold to private individuals primarily through public auctions. These
businesses usually had an average book value of US$35,000. The total sales volume of
assets from small-scale privatization reached US$1.1 billion by mid-1993 when small-scale
privatization terminated.

Large-scale privatization was designed primarily to
privatize large industrial enterprises. These enterprises have either been sold directly
to pre-approved buyers or transformed into joint-stock companies whose shares were sold
either directly to investors or through voucher privatization. Enterprises have been sold
both to domestic and to foreign investors. In large-scale privatization, 4,227
privatization projects representing property worth approximately US$30 billion were
forwarded to the National Property Fund (NPF).

Trade statistics

The trade balance ended in a deficit for the year as
a whole. This deficit was almost offset by a surplus in trade in services and a surplus of
the balance of unrequited transfers. The overall position of the current account
operations was principally the result of transactions in convertible currencies.

Current Account in Convertible Currencies (US$ in
Million)

1992

1993

1994

Balance
of trade

-1,901
.6

-609
.2

-849
.6

Balance
of services

1,485
.9

1,040
.7

1,035
.6

Balance
of incomes

5
.6

-128
.4

-20
.5

Unrequited
transfers

105
.0

130
.0

124
.3

Total

-305
.1

433
.1

289
.8

(Czech National Bank Annual Report, 1994)

The current account surplus in convertible
currencies was highest in the first half of 1994. The growing trade deficit gradually led
to a reduction of the current account surplus to a level of US$290 million by the end of
the year. The favourable outcome in the services account covering the balances of trade
and of incomes was the reason for the current account surplus. In 1994 incomes from
tourism amounted to Kc 56.6 billion (US$2.0 billion) and expenditures to Kc 30.9 billion
(US$1.1 billion).

The multiple devaluation of the crown in 1990 (on 1
and 8 January, 15 October and 28 December), created a "cushion" for domestic
exporters in terms of price competitiveness. Since January 1991, the nominal exchange rate
of the crown has remained stable, while the real effective exchange rate of the crown has
increased due to a faster growth in domestic price level compared to that of the Czech
Republic's trade partners (in some cases also because of devaluation of their currencies).
The effects of the devaluation are gradually fading. Consequently, the exchange rate is
beginning to put increased pressure on exporters, in particular those whose costs and
quality of production still have much to improve, when compared to the competition.

The advantages of an undervalued exchange rate were
gradually reduced and offset by an increase in the prices of exported production.

A gradual strengthening of capital inflows and
increasing foreign exchange reserves are the main features of the balance-of-payments
development since 1992. The factors of the growing capital inflow can be found on both the
demand and supply sides. The growing demand for foreign capital was particularly due to
the need for long-term capital resources brought about by the privatization process and by
the subsequent restructuring of enterprises, and the lower prices of such resources
compared to the domestic level.

On the supply side, the continuing interest of
foreign investors mainly reflected the comparative advantages of the Czech economy
(particularly lower wage costs) the interest rate differential, the macroeconomic
stability, and, connected to this, the stability of the foreign exchange rate, the
substantial scope for portfolio investment and the expanding room for direct investments.

The factors on the demand side were determinant for
the capital inflow. The bulk of net capital inflow in 1994, totalling US$2.3 billion was
directed towards large enterprises and joint ventures. To a significant extent, the
make-up of portfolio investment mirrored direct investment in the most important domestic
enterprises.

While capital inflow from official foreign sources
dominated during the first two years of transformation (from the IMF, European Union,
World Bank and G24 governments), the private capital component in the foreign resources
inflow became important in subsequent years. In 1994 the capital inflow from official
sources was minimal (only US$8 million was drawn from the European Investment Bank). The
growing foreign exchange reserves led to a decision to repay ahead of schedule US$1.110
million lent to the CNB by the International Monetary Fund, thus substantially reducing
the indebtedness towards international financial institutions. In 1994, a reduction of the
net capital inflow, expressed by a total capital account surplus of Kc 97.0 billion
(US$3.371 million), including Slovakia, has been reported.

The development of the capital account in
convertible currencies (Slovakia excluded) is illustrated in the following table.

Kc in billion

1992

1993

1994

Direct
investments

27
.8

15
.1

24
.2

Portfolio
investments

-0
.7

30
.9

23
.6

Other
long-term capital

9
.1

15
.4

24
.7

Short-term
capital

-36
.1

15
.6

-2
.1

Total

0
.1

77
.0

70
.4

(Czech National Bank Annual Report, 1994)

The foreign capital inflow led to a surplus in the
overall balance of payments. Gradually growing capital flows (particularly foreign
financial credits to enterprises, direct and portfolio investments) were mainly initiated
by internal changes in the Czech economy, especially by the completion of privatization,
by the restructuring process and by the start of an economic recovery.

In 1994, the foreign exchange reserves reached their
highest level since the beginning of the transformation period. In the course of this
year, the value of the foreign exchange reserves of the Czech National Bank increased by
additional US$2,372 million to US$6,243 million. The foreign exchange reserves,
accordingly, represented five months` imports of goods and services in convertible
currencies. The increase of the foreign exchange reserves of the entire banking system was
higher, amounting to US$2,648 million, thereby, the foreign exchange reserves of the
banking system increased to US$8,872 million.

Services

The service sector has also been subject to profound
changes since 1989. The process of autonomous liberalization, deregulation and
privatization has led to the establishment of basic regulatory framework respecting market
rules and principles have led to its major expansion. Foreign ownership is this sector has
increased significantly.

Changes in the domestic regulatory framework and
growing role of services sector in the national economy enabled the Czech Republic to
become an active participant in the Uruguay Round negotiations on trade in services. The
Czech Republic supported the creation of new multilateral rules and disciplines and
liberalization of trade in services.

The Czech Republic took commitments which
consolidated previous liberalization measures and made a large number of them
internationally binding. The commitments are contained in the Czech Republic's Schedule
annexed to the GATS. They cover almost all services sectors, with the exception of those
in which no consensus was reached or which are subject to the ongoing negotiations.

The market access commitments are offered under the
national treatment principle, with a small number of exceptions as specified in the
national Schedule.

Intellectual property

The Czech Republic pursues an active policy in the
area of intellectual property aimed at ensuring meaningful protection of intellectual
property rights in its territory and preventing distortions and impediments both to
domestic and international trade. The Czech Republic is presently in the process of
preparation of the relevant amendments to its IPR legislation ensuring the implementation
of the Agreement on Trade-Related Aspects of Intellectual Property Rights concluded within
the framework of the Uruguay Round.

In the bilateral and plurilateral relations the
Czech Republic has included in its agreements with other countries (EU, EFTA, CEFTA)
provisions on the protection of intellectual property with the aim to improve the
protection of IPR which contributes to the promotion of trade and transfer of technology.
It may be stated that the Czech legal protection of intellectual property is at present
already harmonized with the corresponding legislation of the West European countries.

(1)The six agreements are the Czech-Slovak Customs
Union, the EU Association Agreement, the Central European Free Trade Agreement (CEFTA,
which includes the Czech Republic, Hungary and Poland) and free-trade agreements with
Romania, Slovenia, and the countries of the European Free Trade Area (EFTA). Back
to top